‘Hybrid’ Organizations a Difficult Bet for Entrepreneurs

Hybrid organizations combine the social logic of a nonprofit with the commercial logic of a for-profit business, but are very difficult to finance. So why would anyone want to form one? Julie Battilana and Matthew Lee investigate.

by Michael Blanding

Consider two organizations with the same noble purpose: to solve the problem of poor eyesight in developing countries. The first, the Centre for Vision in the Developing World, follows a traditional nonprofit model, soliciting donations that fund the creation and distribution of specially designed eyeglasses that can be calibrated by the user to circumvent the need for an optometrist. The second, VisionSpring, follows a different approach, working to build a network of entrepreneurs who sell eyeglasses in their communities. Rather than raise funds through donations, it sustains itself primarily by the sale of the glasses themselves.

VisionSpring is what organization scholars call a "hybrid" social venture, since it combines the social welfare logic of a nonprofit and the commercial logic of a for-profit business. When hybrids work, they can be a fantastically creative means of solving real-world problems in totally self-sustaining ways, harnessing the strengths of both for-profit and nonprofit models.

But they are a difficult bet for entrepreneurs starting out in the field of business. Because hybrid social ventures fall into a gray area between business and charity, they aren't easily funded by venture capitalists on the one hand or philanthropic foundations on the other.

"It's much harder to get started and be successful if you don't fit into a well-defined form that people understand." —Matthew Lee

"It's much harder to get started and be successful if you don't fit into a well-defined form that people understand," says Lee. "Creating a new hybrid is difficult to explain as a rational choice taking this limitation into account."

Lee and Battilana sought other explanations for the existence of such "zebras," including the entrepreneur's family, education, and work background. "Knowing these social ventures are diverging from the more traditional commercial or nonprofit ventures, we wanted to understand what made their founders diverge," says Battilana.

In order to gain that understanding, the researchers partnered with Echoing Green, a nonprofit that funds social entrepreneurs through a highly competitive fellowship program. The organization agreed to facilitate research on the many early-stage social entrepreneurs who applied to the annual program. The researchers followed up with a survey that asked questions about their background and experience, ending up with more than 700 responses in their final sample.

Some of what they found was to be anticipated. Sure enough, having a family member who worked in a for-profit firm as opposed to a nonprofit organization corresponded closely with an individual's tendency to incorporate a business logic into his or her venture.

"When you are in a family background and you are socialized into that environment, you adopt certain ways of thinking and behaving and internalize certain values that are dominant in your environment," says Battilana.

The same went for educational background. "When you are exposed to a certain type of content, you start internalizing it and taking it for granted," she says.

The final factor, work experience, however, didn't play out as might be expected. Working for a few years in a commercial firm significantly increased the chances that an entrepreneur would create a hybrid social venture rather than a traditional nonprofit. But after that initial spike, the increase diminishes with each successive year. After 22 years working in a corporate environment, additional business experience actually makes an entrepreneur less likely to incorporate that experience into a social venture. (The researchers corrected for age in their analysis.)

Lee and Battilana explain this finding by pointing out that as people stay in a certain type of organization for a number of years, they may become more rigid in their modes of thinking about organizational possibilities and less able to see connections between different modes. When longtime businesspeople go on to start a social venture, they are consequently less likely to see how the for-profit and social welfare approaches can be combined. In this way, business experience may actually make them more likely to create a traditional charity, rather than a hybrid social venture.

Jump sooner

That's good news for those who are considering starting a hybrid social venture, an increasingly popular interest among her students, says Battilana.

"Young people are getting more and more excited about these new forms of entrepreneurship, but they also realize it's quite complicated, so they think they need to get some for-profit experience to equip themselves," she says.

According to the researchers' findings, however, they may not need as much corporate experience as they think.

"Many people are asking themselves when they should jump from their corporate job to start the social venture they've been dreaming about. Our findings suggest that if you're working in business to get the business mindset, there may be a case for jumping sooner," says Lee.

About the author

Boston-based writer Michael Blanding is the author of The Coke Machine: The Dirty Truth Behind the World's Favorite Soft Drink.

Comments

Zufi Deo

Founder, www.bizstuff.co

I think hybrid org.'s / Social Enterprises are better suited in many ways to serving the community than charities.

Why? they can only survive if they are satisfying the target groups they are meant to serve. This means as the needs of the target market change they are likely to follow. This dependence forces them to be more in touch with their needs.

One of the disadvantages traditional charities have is they revenue sources can be different to the user of their services. So there will also a gap between the changing needs of their target group and their ability to service these needs.

Look forward to other comments.

Shane snipes

shaneSnipes.com

This view of hybrid organizations might be the true 5 years ago but now social impact investing is changing that.

Jan Fersing

Retired, but volunteer at non-profit, Expanco, Inc

It may not be quite the same, but I am volunteer board chair of Expanco, Inc in Ft. Worth, a work center for adults with mental and physical disabilities. We have about 140 employees coming to our facilities every day, and have a plethora of contracts - some federal set-asides, others with the State of Texas, and many others with private industries in the area. We do a variety of sub-contract jobs, requiring a variety of skill and abilities present in our varied and diversified workforce. We are not a United Way member, but do receive donations, most of which are used for trucks, computers, new air conditioners, etc.
We have one component division which competes commercially in a profit-making venture. We do secured document destruction for banks, CPA firms, attorneys, the IRS, hospitals, etc. Our higher performing clients can be used to separate white from colored paper which we subsequently machine shred , bundle and sell on the varying scrap paper market to help earn a profit. We also train some of our other clients and help place them in competitive jobs in local industry - retail stores, warehouses, etc. Overall it is a very satisfactory experience, both for us a volunteers and particularly for our client population who can be paid at lower rates consistent with their abilities, and receive training, socialization, and other benefits rather than sitting in front of a TV all day in a group home.
We are chartered as a non-profit, and are actually part of a "trade association" of similar non-profits performing a variety of jobs all over the country. Some clients with vision or hearing deficiencies are good at other jobs, and our challenge is to find the right type of work that fits with their "special abilities". Jan Fersing, MBA '64

David Noble

Development Director, Sun Sounds of Arizona

Shane - can you give examples?

Our charitable organization is making plans to launch a for-profit venture (it may become a hybrid) for the perceived benefits of sustainability and growth potential that earned revenue provides.

We feel there is a much more direct link between sales efforts and income vs grant proposals/solicitations and income. We're excited to try!

Thanks for sharing the article.

Rob Kasameyer

Green Status Pro

Could crowd-sourcing be an effective alternative to finance Hybrid ventures?

Masco R. Settles

President, ROE, LLC

I like the article and the insight. I will review the white paper and look to share some information with you about the Roots of Ellaville, LLC that I believe fits in this "Hybrid" Category. Look forward to exchanging ideas with you.

Do savings banks fit into the "hybrid" organizations, especially those that provide inclusive finance that include the poor?

Maciej

Consultant, Applied Ethics Solutions

There is much evidence out there that hybrid companies have a great potential to trigger positive social change. Hybrid firms are more numerous and have been around for much longer that one may typically think.

For further evidence and examples you can look into:
- Philantrocapitalism, a report by the Economist
- Compassionate capitalism, a book
- Civil economy, a book by Stefano Zamagni

Hybrid companies seem to offer an interesting middle point between purely for-profit utilitarian corporations and charity-driven social organizations. Even the Vatican got interested in hybrid capitalism as a more ethical and socially responsible way of doing business (Cf. Benedict XVI, The encyclical letter Caritas in Veritate).

Barbara Dyer

President & CEO, The Hitachi Foundation

It need not be a choice between hybrids and non-profit. Doing good can also be a for profit. With the emergence of Benefit Corporations, companies that incorporate social and/or environmental impact into their business models, social entrepreneurs are presented with a menu of options for legally incorporating their businesses. One of the qualifications for The Hitachi Foundation's Yoshiyama Entrepreneurs is a revenue generating component to their business, no matter what classification their business falls under. As it turns out, more than half are incorporate as for-profit and all are exemplary entrepreneurs with much variation in their approaches to profit and financial models. Although our program is relatively young (this is our 4th year in operation), we are proud to see that all of the Yoshiyama Entrepreneurs are still in business and are seeing the benefits of tackling social issues through innovative business models. For
more on this see our Good Work Blog: http://www.hitachifoundation.org/news-a-views/thf-blog/455-doing-good-social-innovation-business

Frank Burgers

Founder/Director, CMRA (Center for Municipal Research and Advice)

Interesting article. We however never considered personal social backgrounds when we set up our not-for-profit not-for-loss company in South Africa. We were just trying to find the best way/vehicle of ensuring that our mission 'strengthening local government in southern Africa' could be fulfilled and this hybrid model seemed to be a good option. Our income comes both from donors and through paid services; so far we have been successful.

I do indeed experience the struggle to explain how CMRA gets financed. That grey area of not being 100% profit or 100% charity mystifies many partners/clients.

Kapil Kumar Sopory

Company Secretary, SMEC(India) Private Limited

Combining social welfare aim with commercial considerations leads to creation of a hybrid social venture. People with satisfactory for-profit corporate experience are more likely to create successful social ventures. No doubt operating such ventures is a bit complicated but if it is realized that the social aspect is prime and the beneficiaries can be made to understand and appreciate this, results can be as expected. One thing more, costing of the products and services has to be such that at no stage it is felt that more than the possible is being shelved out. Thus costs have to be very reasonable with thinner profit margins. After all this is all for social good and the clients cannot be from affluent groups.
Before starting a hybrid the viability must be worked out very minutely for there is little scope for more earning later on.

Dr.Arun Kumar

President, Development Alternatives, India

The researchers need to take a broader view of the evolving eco-system of social enterprises and Hybrid Organisations; experience per se is one variable though in our opinion not a dominant one. If there is acceleration in the scale and emergence of hybrid organisations world-wide; the fact is that the efforts of early leaders in this space has convinced 'doubting thomases' that alternative approaches work for solving the problems of poverty and the environment. Going forward, one crucial factor is the emergence of leadership and mentors who are able to scale the growth by becoming role models for the new generation of enterpreneurs ready to solve societal problems at scale.

Quinetha Frasier

Managing Partner, Social Mission Architects

There is ample reason for one to consider the 'hybrid' social venture, as it presents a more sustainable businesses model. This is why the capital markets are evolving to include impact investors, who seek both a financial and social impact return. Funding should not be a deterrent to innovation and disruption in the 'social benefit' sector. In fact, getting out of the traditional 'boxes' of providing social solutions will stimulate a shift in how funders perceive and approach their participation. We desperately need this movement. It will revolutionalize how both nonprofit and social enterprises quantify their actual social impact.

Stefan Pagacik

Co-Founder, The New Economy Partnership

I strongly disagree with the notion that one should jump early in one's business career to start a social venture. My colleagues and I have more than 85 years combined business experience and are committed to developing a hybrid model and fund that supports the creation of new careers (not jobs), industries and the advancement of innovative technologies while supporting humanitarian efforts globally. I would argue that more and more business 'vets' are moved to give back while retaining a profit motive and assisting those who lack the resources, knowledge and capacity to build a business. It goes to the heart of our model.